Supreme Court Declares Income Tax Unconstitutional
by Edward Mendlowitz, CPA, Partner, WithumSmith+Brown
The Supreme Court has declared the income tax to be null and void. In a momentous decision written by Chief Justice Melville W. Fuller, the Supreme Court in a 5-4 decision said that Congress does not have the power to invoke an income tax. Accordingly, the income tax laws have been struck down as invalid and the Federal Government is no longer empowered to impose and collect an income tax.
Senator David Bennett Hill said after the decision “I am naturally gratified. I never had any doubt that the tax is unconstitutional. There was never any good reason for the income tax law. It was pressed upon Congress by a lot of cranks and disturbers.”
In an editorial addressing this decision the New York Times said it was a remarkable win against an unfair, unpatriotic and unwise law. The Times also saw the decision as evidence that the Court is capable of resisting the influence of partisan prejudice. The Times further stated that the country is more secure from discredit and confusion, as it is an essential condition of order and progress that the plain meaning of the Constitution shall be calmly considered and fairly interpreted.
Thomas Harland, ex-Deputy Commissioner of Internal Revenue, said a few days before the decision that he expected the income tax law to be overturned. He also said that, even if it were not overturned, he cannot imagine how the Federal Government could administer over such a tax. He said that the mechanism for setting up a system of collection of the taxes is so inadequate that the government will be practically powerless to collect the tax unless it is willing to accept such returns as taxpayers may voluntarily make, without any attempt to verify the correctness of such returns.
The events leading up to this historic decision have their roots in the Civil War when an income tax was set up to raise funds for the Federal Government to dispel the Confederacy. This income tax was not challenged and was in effect until the end of the war, at which time it was terminated. Now Congress has again attempted to tax income, particularly municipal bond interest, and rents, which led to the Supreme Court case. This case is actually the result of three separate actions brought against the government challenging the validity of the income tax. These have been joined together to arrive at the instant decision.
Interest in the case has been widespread. The issue was not whether the government had a need for the funds or should have the funds, but rather the method of taxation. In this case it had been clearly felt that the Federal Government had no right to directly tax individuals. That should be left to the states. Another major issue that was not ruled upon was the inequity of the tax. The law only taxed such income as to exempt 98% of the population and was considered a tax only on the wealthy. Accordingly it held widespread support.
The entire decision and concurring opinions cover hundreds of pages and is cited as Pollack v. Farmers Loan & Trust Co. (157 U.S.429; 15 S.Ct.673).
Post script: Happy April 1st! However, surprise of surprises - everything written here is true and actually occurred. However, the Supreme Court decision took place in 1895. In order to make an income tax constitutional, the 16th Amendment was enacted in 1913. On March 1, 1913, the first income tax Form 1040 that gave birth to our present system was made available. By the way, the rate in 1895 was 2% on income over $4,000 (equivalent to about $105,000 in today’s buying power). Also, the first tax law was tacked on to other legislation and went into effect on October 3, 1913 retroactive to March 1, 1913. Some things never seem to change! Note that the next available number for federal forms at that time was 1040.